By Anand James
Nifty Bank could see new trading range
We have had a long and sustained period of overbought conditions, that is characteristic to bull markets. Even those strong bull markets do hit air pockets mid air, and our favoured view expects one such speed bump soon. MACD is yet to cross the signal line from above to give an outright signal, but it appears it would do so in a few days, even as its histogram is on a declining trend approaching the centre line.
We would be weighing the prospects of either a time correction that would see only a moderate spate of corrections within the 53750-52700 region, or a steeper drop to 50000. Alternative scenario would be to expect dips not to sustain long below 53850, in which case a run up to 55600 could be seen. Either way, brace for new ranges.
Nifty: Questions marks
We had gone in last week with a target of 26,600, which appeared to be a lofty objective at that point. But such was the urgency with the bulls last week that we reached close to a 1% of the target before settling lower. Will this week show the same urgency? Let us investigate.
On the September expiry day, FIIs covered 34% of their shorts from their index future portfolio, that atleast partly explains the strength of the vertical rise we saw in the closing hour of last Thursday. Now, while this took up their long proportion to 79.9%, a near term extremity this was not a one off event borne out of expiry dynamics.
The day after expiry also saw long addition, but more importantly, it also saw short reduction by nearly 6%. The long now proportion now stands at 81.5%, or in other words, For every index short, there are now 4.39 longs held. It is not only the proportion that appears extreme.
The total OI is also unprecedented and the highest this year so far. Last expiry also panned out under similar circumstances, albeit with a lower OI count. And it took three days of moderate gains post expiry, for a substantial decline to unfold.
One of the tail winds that we have lost over the last week is the discount. Index futures are now back into premium suggesting that the surprise buying squeeze on the spot is now over. Lastly, VIX had eased considerably last week, and standard deviation studies suggest that we are at an extreme here too.
In other words, though price action is yet to indicate strongly towards a fall, as momentum is still giving tailwinds, we have enough conditions for consolidation or a time correction. Brace for volatility.
Sectoral Cues
Nifty Auto Index
The Index has moved into uncharted territory and we continue to maintain our positive stance on Auto stocks ahead of the festive season. More room left for further upside in Auto stock as only 27% of Auto Index components have moved into the overbought region.
Four-wheeler and heavy vehicle makers like Maruti, Tatamotors, M&M, Eichermotor and Ashokley, which together form more than 57% of Nifty Auto index, look strong and could push the index higher in coming days. TVS Motor could be a dark horse in the month of October.
Nifty Financial Services Index
After the recent uptrend, Nifty Financial Services Index has formed a Shooting Star candle in the weekly chart, a bearish reversal candle pattern even as 50% of the index components are either overbought or near overbought zone.
The overall outlook remains positive for the index in the medium term but short term profit booking is expected which could take the index down towards 24500 levels. Index heavyweights like HDFCBank, ICICIBank, Kotakbank and Cholafin, which together form around 48% of the index, looks exhausted and could see pull back. SBIN and Bajaj twins look positive though and could offer support.
(About The Author: Anand James is the Chief Market Strategist at Geojit Financial Services.)
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