Conflicts can turn into war without a warning and trigger higher volatility in asset prices. That means traders need to tread carefully. I have been warning my readers since last year that 2025 marks a phase of procyclicality in financial markets. This phase witnesses asset prices moving in the same direction as the broader global economy. That means relatively lower returns and a higher capital outlay.

Last week, I wrote that there was a one-in-three possibility of oil prices climbing higher and Iran choking off the Gulf of Hormuz. The Gulf of Hormuz remains open for shipping as I write this piece. And energy markets remain adequately supplied, as I have been maintaining for many quarters. It is the fear of supply chains breaking down that has led to price rise rather than the demand-supply equation changing. Unless the hostilities take a very ugly turn, energy price rallies are likely to be limited. These price gyrations can lead to turbulence in the stock prices of oil marketing companies (OMCs). Should oil and gas prices rise substantially, OMC stock prices can come under pressure.

Industrial metals may see a routine month-end rally, which can possibly push up prices of metal mining stocks as long as overall market sentiments are constant. Bullion can correct, especially if peace overtures and strength emerge in the US dollar. However, the long-term story remains bullish, and delivery-based investors should continue to think beyond 2025. Bullish triggers for a rally in bullion remain intact.

The announcement to reduce provisioning on infrastructure project-based lending may trigger a mild near-term uptick in some infra stocks. Public sector undertaking (PSU) stocks will continue to remain in the limelight. The government has expressed interest in offloading stake in select PSU banks, and that may keep trading activity focused on these stocks. Being an expiry week, volatility may be above average, and traders are likely to be focused on rolling over or squaring up their existing trades. Fresh buying activity may be limited as long as Middle East hostilities are visible on the horizon.

Fixed income investors should continue to keep the powder dry and wait for better opportunities. 

I suggest my readers trade with stop losses and tail risk hedges in place. A tutorial video on tail risk (Hacienda) hedges is here – https://www.youtube.com/watch?v=7AunGqXHBfk 

Rearview Mirror

 

Let us assess what happened last week so we can gauge what to expect in the coming week.

The rally was led by the broad-based Nifty 50 index, and the Bank Nifty brought up the rear. A strong dollar and easing bullion prices calmed the nerves of traders. Uncertainty remains elevated, though. Oil and gas prices rose marginally, and that was a relief as traders were anxious about energy prices going through the roof. The rupee slipped against the dollar, capping the upside in our markets.

Indian 10-year benchmark yields rose, which means bond prices were lower. That exerted some pressure on banking stocks. The National Stock Exchange (NSE) gained 0.12% in market capitalisation, which tells me the rally was rather narrow. It was the index-weighted stocks that gained more than small and madcap stocks. Marketwide position limits (MWPL) rose along routine lines.

US markets were edgy, and that kept our markets in check too.   

 

Retail Risk Appetite

 

I use a simple yet highly accurate yardstick for measuring the conviction levels of retail traders—where are they deploying money. I measure what percentage of the turnover lower- and higher-risk instruments contributed.

If they trade more of futures, which require sizable capital, their risk appetite is higher. Within the futures space, index futures are less volatile than stock futures. A higher footprint in stock futures shows higher aggression levels. Ditto for stock and index options. 

Last week, this is what their footprint looked like (the numbers are the average of all trading days of the week) –

In the higher capital-intensive and higher volatility futures segment, we saw turnover contribution fall. Usually, futures turnover rises ahead of expiry as traders square up in the expiring month and initiate trades in the next month. That results in dual turnover. That was missing last week.

In the relatively lower-risk options segment, we saw that turnover rose in the lowest-risk index options, whereas stock options’ turnover contribution fell. Overall, we saw that risk appetite was quite subdued last week.

Matryoshka Analysis

 

Let us peel layer after layer of statistical data to arrive at the core message of the markets.

The first chart I share is the NSE advance-decline ratio. After the price itself, this indicator is the fastest (leading) indicator of which way the winds are blowing. This simple yet accurate indicator computes the ratio of rising to falling stocks. As long as gainers outnumber the losers, bulls are dominant. This metric gauges the risk appetite of one marshmallow traders. These are pure intraday traders.

The Nifty logged weekly gains thanks to the spike on Friday, which seemed more of short covering than fresh buying (refer to the impetus chart below for more details). That left the weekly advance-decline ratio subdued at 0.84 (prior week 1.12). That tells us there were 84 buyers for every 100 sellers. I have been advocating to my readers that this ratio must stay above the 1.0 level consistently to indicate a sustainable upthrust.

Intraday traders showed lower buying conviction. 

A tutorial video on the Marshmallow theory in trading is here – www.youtube.com/watch?v=gFNKvtsCwFY 

The second chart I share is the marketwide position limits. This measures the amount of exposure utilised in the derivatives (F&O) space as a component of the total exposure allowed by the regulator. This metric gauges the risk appetite of two marshmallow traders. These are deep-pocketed, high-conviction traders who roll over their trades to the next session/s.

The MWPL rose routinely but stayed marginally lower than the previous month’s peak due to the Israel-Iran hostilities. The reading remains the second highest in the past four pre-expiry weeks covered by the chart. That means retail traders are still carrying substantial positions as of now. In the margin trading facility (MTF), retail borrowing for stock investing came down by a mere 0.6% on a week-on-week basis.

High MWPL remains a double-edged sword, as it can lead to a crowded exit if any negative news trigger emerges. Watch this space for data on Friday’s MWPL number.   

A dedicated tutorial video on how to interpret MWPL data in more ways than one is available here – https://www.youtube.com/watch?v=t2qbGuk7qrI

 

The third chart I share is my in-house indicator, ‘impetus.’ It measures the force in any price move. Last week, I raised a red flag as both indices fell, but the impetus readings were higher. The impetus readings for both indices have risen significantly with sharp price declines.

Last week, both indices rose, but the Nifty showed a falling impetus reading. This means the rise in the broad-based Nifty was more due to short covering than fresh buying. This is consistent with the pre-expiry behaviour of bears. Long positions are rolled over more aggressively than shorts.

I remind my readers of the bicycle analogy. I consider both these indices to be the two wheels of a bicycle. Unless both move in tandem, the bicycle risks toppling over. Watch this aspect keenly in the week ahead.

The final chart I share is my in-house indicator ‘LWTD.’ It computes the lift, weight, thrust and drag of any security. These are four forces that any powered aircraft faces during flight, so applying them to traded securities helps a trader estimate prevalent sentiments.

The Nifty clocked gains, but the LWTD reading fell to -0.20 (prior week 0.11), which tells me fresh buying support may be limited or weak. This is consistent with an expiry week. Sure enough, short covering can cushion declines, but we need forceful buying to trigger a sustainable rally.

A tutorial video on interpreting the LWTD indicator is here – https://www.youtube.com/watch?v=yag076z1ADk 

Nifty’s Verdict

 

Last week, I wrote that the bears had inflicted a non-fatal stab wound on the bulls by way of a bearish piercing pattern. Now, we find a bullish candle on the weekly Japanese candlestick chart. However, the body of this candle is contained within the prior week’s candle. This is called an “inside formation” in the Western style of technical analysis. It signals indecision and consolidation. Follow-up action invariably determines the near-term outcome.

The support level of 24,400 advocated last week remains valid, and as long as bulls keep the Nifty above this threshold, bulls still have a chance. The resistance remains at 25,250, which must be overcome on a sustained closing basis, or else a fresh breakout may be elusive.

 

Your Call to Action

 

Watch the 25,250 level as a near-term resistance. Staying above this level strengthens bulls.

Last week, I estimated ranges between 57,175 – 53,850 and 25,400 – 24,025 on the Bank Nifty and Nifty, respectively.  Both indices traded within their specified resistance levels.

This week, I estimate ranges between 57,800 – 54,700 and 25,725 – 24,500 on the Bank Nifty and Nifty, respectively.
Trade light with strict stop losses. Avoid trading counters with spreads wider than 8 ticks. 

 

Have a profitable week.

Vijay L. Bhambwani

Vijay is the CEO of www.Bsplindia.com, a proprietary trading firm. He tweets at @vijaybhambwani.