By Anand James
Though we had advised caution at the start of last week, there was no mistaking that our bias was towards an 18,300 move. This conviction had encouraged us to push the downside marker higher to 17,580. Though the upside expectation appeared counter intuitive especially given the event risks ahead, by way of inflation readings, the stance was vindicated, as Nifty took slow but sure steps higher, even as the downside marker remained intact through the week. However, congestion resistance in the 18,100 vicinity stalled upside attempts in the latter part of the week after the inflation readings first and the Fed comments later failed to give directional cues. And this brings to fore, a key event risk that we had noted last week as well, which is a lack of volatility.
With VIX hovering around 13, trading ranges of most stocks had remained lacklustre, ensuring that a broad based participation from traders went missing even as Nifty pushed higher and for a brief while even crossed the 50 DMA, only to close below, the next day. Apparently, Nifty’s push higher was prompted by only a handful of stocks, while broad market lagged. In fact, it was the heavy weights, namely IT (TCS and Infy) and Banking (HDFCBANK and ICICIBANK) along with Oil Major Reliance that drove Nifty up last week.
The top 10 stocks in Nifty 50 in terms of weightage, moved up an average ~1% this week till Thursday, but 54% of Nifty50 stocks are trading below the wall of worry posed by 50DMA. This is not an outright bearish construct though, as historically, major index moves are often triggered by a handful of stocks, whose positivity ultimately spurs other stocks to aim higher, with time.
VIX under 13 is also suggestive towards traders getting comfortable with levels above 18k, even though volatility skew hints at an increase in bearish bets. This skew has already forced a lower close on Friday, resulting in an evening start candlestick pattern, usually a reversal pattern. However, Friday’s close is above 14 day EMA, as well as upper trendline of a falling price channel that has held price since 1st December 202, encouraging us to look for December’s reaction high of 18,265 initially before collapse theories are entertained. Downside views see 17,300 as the favourite destination being in the vicinity of 200 DMA, but we see low potential of the same, as long as slippages do not extend much beyond 17,750.
(Anand James, Chief Market Strategist at Geojit Financial Services