By Anand James
Volatility expectations remained low last week
Directional clarity was missing in the week before last after multiple swings tested both extremities without signalling enough intent to break free. Yet, see that soft VIX had set up conditions for sustained push higher last week, despite directional moving indicators remaining weak. The surge last week was characterised by various index heavyweights taking turns pushing Nifty higher and higher every day until Friday. This ensured that Nifty’s rise was not a single-day event that would have taken momentum off the trend quickly.
Nifty’s correction appears muted despite fully achieving the 24130 objective
If there has been any surprise to last Friday’s declines, it is not that it came against the run of play on the last working day of the week, but that it was quite small when compared to the large upsides seen over the last couple of weeks. And this has happened despite almost all oscillators remaining at overbought levels for sustained periods with some showing negative divergences as well. But it appears that Friday’s decline only serves to take the edge off the severely overbought conditions and perhaps sets up the stage for more upsides. This is evidenced by the fact that there has not been a MACD crossover as yet and that the directional moving indicators have made a crossover after remaining soft and muted until last week, suggesting that the trend is about to get directional. However, it would be prudent to turn greedy just when Nifty has registered its strongest down close in the last two weeks. We will allow for declines to persist initially, eying the maturity of a declining wedge in order to mount the upsides, but will be equally prepared to play a downtrend, on the slippage past 23900, our initial downside marker.
Bank Nifty’s upsides not over yet
With Bank Nifty, the urge to push higher was very evident even in the week before last, which was in stark contrast to the signals seen from Nifty. Last week, we noted the presence of a flag, which is a bullish continuation pattern, had encouraged us to pencil in 52400 for last week, a lofty upside objective on first look. However, as it turns out, this calculation was dwarfed by the surge that unfolded which catapulted prices to 53030 before turning lower on Friday. Friday’s declines, meanwhile, have raised fears of major declines. We know that prices have swung lower from the upper Bollinger band extreme with RSI at an overbought level. However, MACD is yet to crossover, with candlestick patterns not convincing enough as a reversal sign. With these in perspective, we believe that a turn higher could unfold without penetrating 51500.
Sectoral Cues
Despite the fall from the top on Friday, we do not see a structural breakdown across sectors. Small-cap stocks are under pressure though, with only 44% of small-cap index stocks trading above their respective 10-day SMA and this decline has unfolded through the week. This suggests that smart money is risk averse, sectoral components have not given away gains, with more stocks finding themselves above their respective 10-day SMA on Friday than on Thursday despite the down close on Friday. PSU Banks and Realty stocks have the most to gain as a mean reversion to the 10-day SMA.
(Disclaimer: Anand James is the Chief Market Strategist at Geojit Financial Services. Views, recommendations, opinions expressed are personal and do not reflect the official position or policy of Financial Express Online. Readers are advised to consult qualified financial advisors before making any investment decisions. Reproducing this content without permission is prohibited.)
