Market Chronicles for the week ended 1st January, 2021.
Wishing all our readers a joyful and prosperous New Year 2021!
Nifty ended the month of December 7.8% in the green. This brings us to the end of an incredibly volatile 2020, amidst what is probably the most hated bullrun of all time. Breadth remains healthy, and we remain BULLISH going forward. Any dips should be considered buying opportunities.
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
In December, FIIs net bought 48224 cr of stock, while DIIs net sold 37293 cr of stock.
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 below shows an RSI divergence developing, and also 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)
Ichimoku (W)
Nifty Intraday
Key levels marked
Bank Nifty
Bank Nifty has a precarious setup. On the one hand, the index is just a few % points away from a fresh ATH. It has developed a bearish RSI divergence on the daily chart. While we remain hopeful, the possibility of a severe correction cannot be ruled out
Trendline on the daily chart can be used as reference
Bank Nifty vs Nifty (Relative Strength Chart)
The RS chart of BN is trapped beneath a major resistance level. 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 has had a great 2 months, and is now just a few % pts away from ATH
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. The index broke out in December, but still remains constrained under a resistance level on RS chart
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 in December, 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
USDINR
The currency pair finally shows a convincing breakout from the long term trendline. Immediate support lies around 72, and if that gives way, 69 would be an important level to watch for
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
We haven’t always seen Nifty having its highest OI at the same strike, but when that’s been the case, Nifty has shown a large move (on either side). This was also the case on the Monday where the markets corrected due to NSE’s technical snag.
We are seeing this on Friday’s closing OI data as well, with the 14k strike having highest OI on both sides. The 14,400 strike has seen a considerable increase in OI which may be a more reliable indicator. And it seems the increase in OI at 13,900 may indicate that would be the next line of defence for bulls in case the markets correct.
Bank Nifty
Banknifty appears comfortable above 31k. The OI range is not similar to Nifty’s but what intrigues us is the high change in OI above 32k. It may indicate that option writers on the call side have gone long that strike as a hedge, or otherwise.
Either way, it looks quite interesting, though not as unusual as what we are seeing in Nifty.
Heavyweights in the Nifty 50:
Let’s look at some important stocks in Nifty50 that collectively make up around 42.40% 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. A significant change is that Reliance is back at the top, HDFC Bank is now #2! Infosys has also moved up one place, coming in at #3.
On the chart front, we’ve used naked charts, for the most part, to display the price action better.
1. Reliance Industries: The price is consolidating above 50DMA, a positive sign. Also, it is above the 13DMA and 21EMA, both good signs. That said, we can’t ignore how much selling pressure RIL has faced. Perhaps Q3 earnings release may be a positive/negative trigger that the stock needs for moving out of the range. On the bullish side, breaching 2050 is imp, on the bearish side, breaching 1940-1960 is imp as they’ve both acted as strong supports and resistances. (Read the Basics of Dow Theory and trend by clicking here).
- HDFC Bank: HDFC Bank moved sideways this week, walking right into the supply zone that has troubled it up until this point. The Friday closing candle looks quite bearish as it’s managed to breach Thursday’s low (a spinning top). If selling continues, not only will it impact Nifty (as it did on Friday), but it may also drive the prices down to the support below 1375. It is not trending and hence, the broader direction is uncertain.
- Infosys: IT as a sector experienced a fair bit of profit booking (and has been since a few sessions), so we’re understandably seeing Infosys within a range. What’s interesting is that the prev ATH is acting as an important resistance. The last time we tracked a similar inside bar style formation, Infy was sub-900 and it broke out very well after that. If that pattern is to repeat itself, the stock may give a good move after sustaining above Friday’s high.
- HDFC: After creating a fresh ATH this week, HDFC has done very well, much better than its banking twin. Friday did show a fair bit of profit booking. Friday’s close has almost formed a shooting star pattern, a sign of selling pressure. This may mean that the 2595 level may act as a resistance, not just becaues of the psychological importance of the 2600 level, but also because it appears to be a supply point.
- ICICI Bank (5.84%): ICICI Bank has bounced up very well after the retracement we drew in the previous editions of Market Chronicles. In fact, it’s one of the top performing banks and pulled up the index many times. That said, it’s clearly facing cold feet at around 540. Which means that unless Monday brings a strong close for the stock, we may possibly see some correction, especially if the support at 525 is breached. Up until now, 530 was a strong support intraday.
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: Kotak Bank does not look very pleasant on the chart. Intraday, there were several instances where the market was held together thanks to this stock trading above 2,000 but on a Friday closing basis, selling pressure is evident. Taking Thursday + Friday’s candles together, we can see that unless 1980 is respected, the stock may see further profit booking.
- SBIN: has performed very well so far and it continued its gaining streak. In fact, if we look at the pattern, then it almost resembles a flag pattern, with minor consolidation happening in the three candles before Friday. That said, Friday volumes were very low and hence this may not be a reliable indication of bullishness in the stock. Sustaining above 280 should attract fresh longs to the stock.
Volatility:
VIX was on an absolute roll, with Friday taking the cake. Due to what was almost like an IV crush (i.e., where volatility falls down sharply), VIX fell by around 8.5% intraday and as a result, option prices were all over the place.
Whether this is because the market has accepted 14k levels and is stabilizing after vaccination has begun, or whether there’s a more technical reason for this, we will possibly never know. We can but speculate.
Interestingly, Friday was otherwise filled with very choppy moves and consistent selling pressure, but VIX told a different story.
Below is the Daily VIX chart instead of our regular weekly, as it shows Friday’s move better.
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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