Ticker: Markets Cautious Once Again

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Monday, 28 March 2022
A weekly newsletter that delves into markets.

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By Vijay L Bhambwani

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Markets Cautious Once Again

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Last week, I wrote that the feel-good factor may be returning to the market.

That turned out to be premature as the war in Ukraine escalated and the Houthis, based out of Yemen, attacked Saudi Aramco facilities in Jeddah.

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In my January articles, I mentioned Saudi spokesperson Major General Turki Al-Maliki claimed to have documentary evidence of Houthi attacks emanating from Hodeidah and Salif in Yemen. Saudis stated their intent to bomb these two port towns as reprisals. That possibility has now escalated with the latest Houthi acts.

On the one hand, we have the mutual fund industry keen on propping prices for the year-end NAV considerations, and on the other hand, we have rising geopolitical stress.

Clearly, statistical Beta (pure price volatility) is likely to climb. That will make trading challenging for retail traders.

Traded volumes usually fall in March-end due to year-end considerations. That means a little bit of buying and selling can send prices on exaggerated trajectories. So cutting back on traded volumes is the best thing to do.

Rear View Mirror

Let us examine what happened last week to guesstimate what lies ahead.

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Last week, I presented you with statistical evidence using my impetus indicator about Nifty being relatively stronger than the Bank Nifty.

That hypothesis was validated by the Bank Nifty falling more than the Nifty. Two adverse triggers confronted domestic bulls – a rising dollar and zooming oil and gas prices. Both are inflationary.

That sent bullion prices higher on safe-haven buying. The Rupee lost 0.47% versus the dollar. Bond yields rose with fears of rising inflation. NSE shed market capitalisation as traders held back buying decisions.

Market-wide position limits (MWPL) continued to rise as traders built up exposure along routine lines.

Overseas markets were firm, which cushioned declines in our markets.

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Matryoshka Analysis

Let is peel layer after layer of statistical data to arrive at an actionable plan for the week. We start with the advance-decline ratio. It’s a simple metric that computes the number of rising stocks versus the number of falling stocks. It’s a one marshmallow study as per behavioural finance.

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The advance-decline could not test even the 1:1 ratio for a single day of the week. Intraday traders were clearly taking a defensive approach. Though the risk element is relatively lower for intraday traders due to the absence of price uncertainty on the next day, they did not bite the bait.

The second chart is the market-wide position limits (MWPL) which measures the risk appetite of two marshmallow traders. These traders roll over their trades to the next session/s. They are stronger hands with higher conviction in their trades than intraday traders.

The MWPL is the extent of cumulative exposure taken by all traders compared to the total exposure allowed by the authorities. Up to three months ago, traders ramped up the MWPL between 32-34% in the run-up to monthly expiry. This week is the expiry of the March series, and we are nowhere near 30%.

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The impetus measures the statistical velocity of any traded instrument. Looking at the daily impetus chart of both indices, the first thing that comes to mind is that both indices have witnessed a slump in velocity.

The reason is not far to seek. Intraday ranges of both indices were narrower, so traders sat on the fence.

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The fallout is usually unpalatable. When velocity is compressed like a spring, it stays compressed till the pressure applied on it remains in place.

Once the pressure is removed, the spring rebounds. This means we have higher volatility in store ahead of us. Which way the indices will be going when impetus expands is unknown, but the move may be sharp and swift is a given.

All in all, the picture painted by matryoshka analysis seems to indicate traders must take lower exposure in the markets this week.

Nifty’s Verdict

The daily chart of the Nifty shows the index falling on 4 of 5 trading sessions last week. The week-on-week change was negligible. That explains the lower impetus as discussed above.

The price remained above its 25-day average, a proxy for a month-long holding on the cost of an average bull. The absolute near term outlook remains optimistic as long as the price is above its month-long average.

The round figure of 17,000 needs to be defended on a closing basis if the outlook remains positive.

However, do remember there is trouble brewing in the Middle East after the attack on Saudi Aramco.

That can culminate into another geopolitical stress point at short notice. This is another reason that traded exposure must be curtailed.

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Your Call to Action – Last week, I advocated ranges between 38,350 – 34,500 and 17,975 – 16,600 on the Bank Nifty and Nifty, respectively.

Both indices traded within the specified parameters. This week I expect ranges of 37,325 – 33,500 and 17,825 – 16,475 on the Bank Nifty and Nifty, respectively.

Continue to trade light and maintain stop losses diligently.

Have a profitable week!

Vijay L. Bhambwani – Head of Research, Behavioural Technical Analysis, Equitymaster

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Written by Vijay L Bhambwani. Edited by Saikat Chatterjee. Produced by Samiksha Khanna. Send in your feedback to

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