Should the War Stop Your Investments?
Matryoshka Analysis
Let us peel layer after layer of statistical data to arrive at the core message of the markets.
The first chart I share is the NSE advance-decline ratio. After the price itself, this indicator is the fastest (leading) indicator of which way winds are blowing. This simple yet accurate indicator computes the ratio of number of the rising stocks compared to falling stocks. As long as gaining stocks outnumber the losers, bulls are dominant. This metric is a gauge of the risk appetite of ‘one marshmallow’ traders. These are pure intraday traders.
The Nifty dived 4.45% and the advance decline ratio was expectedly lower as well. At 0.70 (prior week 0.98), it shows there were 70 gainers for every 100 losers. Intraday traders need to exhibit more risk appetite to push markets higher again. Watch this ratio keenly in real time this week. Ideally, it should stay above 1.0 with rising prices to indicate a sustained uptrend.
The second chart I share is the market wide position limits (MWPL). This measures the amount of exposure utilized by traders in the derivatives space as a component of the total exposure allowed by the regulator. This metric is a gauge of the risk appetite of ‘two marshmallow’ traders. These are deep-pocketed, high-conviction traders who roll over their trades to the next session/s.
After making a lower post-expiry low at 31.37% in the prior week, the MWPL rose routinely last week. But the gain was the smallest in the comparable week in three months at 37.27%. That shows some caution, which was expected in light of the Gaza war.
Risk appetite is more or less intact. It is just mildly lower, along expected lines. I expect MWPL to rise this week. Do remember higher MWPL comes with higher volatility as larger exposure needs to get squared (closed) in case of a negative news event. This dedicated video on MWPL will help my viewers understand the concept better
The third chart I share is my in-house indicator ‘impetus.’ It measures the force in any price move.
Last week, the Nifty fell with lower impetus. That is an indirect positive indicator that the selling lacked momentum. The Bank Nifty fell with rising impetus which indicates relatively higher selling pressure. The Bank Nifty has been under-performing the Nifty since at least a quarter now. With a weightage of 32.60%, banking and finance stocks have the potential to drag markets lower.
The final chart I share is my in-house indicator ‘LWTD.’ It computes lift, weight, thrust and drag encountered by any security. These are four forces that any powered aircraft faces during flight; so, applying it to traded securities helps a trader estimate prevalent sentiments.
The Nifty fell sharply last week and the LWTD reading followed suit. At 0.04, it is still in the positive zone. Having fallen from the 0.29 level of the prior week, it indicates milder buying support on declines. Short-covering can occur, however.
While short-covering can lift prices higher temporarily, it takes fresh buying to trigger a sustained upthrust. This tutorial on LWTD will help my readers understand its working better
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Description – Market-Wide Position Limits
Prognosis – Higher risk appetite will trigger volatility
Data Source – Vijay L Bhambwani
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Nifty’s Verdict
Last week, I wrote about the 26,100 level on the Nifty spot which needed to be defended on declines if the uptrend was to sustain. Bulls failed to defend this level and signalled weakness. Also, remember my repeated warnings about the wide difference between the price and the 25-week moving average. That indicated the possibility of consolidation and/or correction since a few weeks. Which means if the Gaza war had not escalated, the correction would have occurred shortly on the back of some other trigger.
The price still remains above its 25-week moving average which is a proxy for the six-month holding cost of an average bull. That means the medium-term outlook is positive for now. The average is placed at the 24,200 level (it will change daily) which is the new support area to watch out for. As long as bulls manage to defend this level, markets can bounce back again.
Only a breakout and sustained trading above the all-time high logged recently at 26,277 level will confirm a new uptrend.
Your Call to Action – Watch the 24,200 level as a near-term support. If the Nifty stays above this level on a sustained closing basis, markets may rally further. A fresh rally is likely only above 26,277 mark.
Last week, I estimated ranges between 55,400 – 52,250 and 26,775 – 25,600 on the Bank Nifty and Nifty respectively. Both indices violated the specified support levels.
This week, I estimate ranges between 52,975 – 49,950 and 25,625 – 24,400 on the Bank Nifty and Nifty respectively.
Trade with strict stop losses. Avoid trading counters with spreads wider than 8 ticks.
Have a profitable week.
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