By Anand James
Ideally, the profit booking that has been on for some time now should slow down, as traders may opt to wait out the budget for taking directional calls. However, if VIX is any indication, Nifty is bracing for significant volatility and range expansion. After languishing in the 12 vicinity for a while, VIX spiked above 17 briefly, before settling above 15 for now. This has begun to push premiums higher, encouraging us to look at straddle plays, or 17,800-18,000 strangles, with expectation of a newer range this month. Besides, a stock specific approach is also preferred given earnings opportunity, rather than taking a directional approach on the index.
From the door steps of 19,000 just a few weeks back, the sustained decline was disappointing, though not unexpected. However, that the psychological mark of 18,000 failed to trigger a solid bounce, appears to have rattled traders, prompting talks of 17,500-300, also evidenced from Nifty put option activity at far OTM strikes.
Consequently, Nifty is back to the vicinity of the low last witnessed in the Christmas week, on 23rd December. However, it appears that for now, this is more of a Nifty event, with bears yet to dominate the broader market as much as Nifty. Incidentally, while 46% of Nifty 50 stocks fell below 23rd December’s low, only 18.6% of NSE 500 stocks fell below their respective lows of the same day. Further, only 10% of small caps have a new low.
Additionally, earnings performance analysis since 2020 shows that Nifty has given a positive return in January every time a negative return was seen in the last 15 days of December. Both these analyses encourage us to hunt for reversal chances in the coming weeks. Nifty will find the 18,040-18,150 region a challenge to overcome next week, but a successful break will clear for short covering rallies aiming 18,320. Alternatively, inability to clear 18,070 or a direct fall below 17,770 will call for 17,500-300, but such a collapse is not the most favoured.
Meanwhile, Bank Nifty is also bracing for a pull back, having closed strongly in the last two hours of Friday. However, the 42,800-900 region would be a significant barrier for further upside prospects. But, even if Bank Nifty struggles to clear this on the bounce, we will stay away from an outright collapse view, until a close below 41,800 is seen.
(Anand James, Chief Market Strategist, Geojit Financial Services. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com. Please consult your financial advisor before investing.)