Edited excerpts from a chat next week:
September has been very optimistic for the market and it looks like we are on track to finish with a monthly gain of around 4%. Skilled Futures renewals were higher, at 79% compared to 74% in the last 3 months. Is the momentum strong enough for us to now dream of 27,000?
We had come in last week with a target of 26,600, which seemed like a lofty target at the time. But the urgency of the bulls last week was such that we reached about 1% of the target before stabilizing lower. Will this week show the same urgency? Let’s investigate.
On September expiry day, FIIs covered 34% of their short positions with their index futures portfolio, which explains, at least in part, the strength of the vertical rise we saw in the late hours of last Thursday. Now, while this increased its long-term proportion to 79.9%, on the short-term extreme, this was not an isolated event arising from maturity dynamics. The day after expiration there was also a long addition, but more importantly, a short draw of almost 6% also occurred.
The proportion of long positions is now 81.5%, that is, for every short index, 4.39 long positions are now held. It’s not just the ratio that seems extreme. The total OI is also unprecedented and is the highest this year so far. The latest expiration also occurred under similar circumstances, albeit with a lower OI count. And it took three days of moderate gains after expiration for a substantial drop to occur.
One of the tailwinds that we have lost during the last week is the discount. Index futures have now returned to premiums, suggesting that the market’s surprise buying squeeze is now over. Finally, the VIX had dropped considerably last week and standard deviation studies suggest that we are at an extreme here as well. In other words, although the price action does not yet clearly indicate a decline, as the momentum continues to give tailwinds, we have enough conditions for a consolidation or a temporary correction. Prepare for volatility.How would you go about trading Nifty Bank in the October series when the market would factor in the impact of earnings and RBI policy?
We have had a long and sustained period of overbought conditions, which is characteristic of bull markets. Even those strong bull markets run into pockets of air in the air, and our favorite opinion expects such a hurdle to occur soon. The MACD has not yet crossed the signal line from above to give a direct signal, but it looks like it will do so in a few days, even as its histogram is trending downwards approaching the center line. We would be weighing the prospects of a temporary correction that would see only a moderate series of corrections within the 53750-52700 region, or a steeper decline to 50000. The alternative scenario would be to expect the declines not to remain long below 53850, In this case a run up to 55600 could be seen. Either way, prepare for new ranges.We are also seeing a clear shift in the pattern from small and mid caps to large caps. What does the chart pattern of both indices suggest? Are there more problems on the horizon in the broader market?
If we look closer, we find that 62% of the stocks in the Nifty midcap 150 index are trading below 20 DMA and 60% are below 50 DMA. 36% of stocks still have an RSI below 50. The percentage of stocks hitting weekly highs has dropped from 34% two weeks ago to 22% this week, suggesting profit booking. Meanwhile, 60% of stocks in the 250 small cap index are still below 20 DMA and 50% below 50 DMA and this has been declining for the last three weeks, suggesting profit booking . 50% of the small cap index stocks are still below the RSI of 50, which has improved slightly compared to last week. Last week, 57% of stocks had an RSI below 50. The percentage of stocks hitting weekly highs jumped from 8% two weeks ago to 29% this week, suggesting a reversal attempt.
Nifty PSU Bank and Nifty CPSE have performed the worst for the month. Do you see bottom fishing opportunities at lower levels?
SBI, Bank of Baroda, PNB, IOB, Canara Bank and Indian Bank, which together form around 77% of the PSU Bank index, have shown signs of price exhaustion. The average RSI of the heavyweights in the PSU index is 50. Bargain-hunting efforts are seen in both indices, which do not appear sustainable and may require deeper declines to attract hard money.
Give us your best ideas of the week.
PETRONET (LTP:340)
See: Buy
Target: 375
Loss Limit: 318
The stock has been in correction mode since late August and appears to be building a base near the 320 horizontal support zone from where a reversal attempt is underway. A weekly candle resembling Marubozu and a weekly MACD histogram showing a reversal point towards the continuation of the reversal with the initial target seen at 360 and subsequently at 375. Long positions can be protected with a stop loss around 318.
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