Technical Analysis

WHAT LIES AHEAD : NEAR-TERM PICTURE

Market is experiencing wild swings and hence, we are not recommending any long positional technical pick this week in our ‘Pick of the Week’.

SPOT NIFTY : The global stock markets mayhem is continuing relentless. The fall across the market and asset classes was severe than 2008 global financial crisis. At the same time, all the major global indices declined over 30 per cent from lifetime highs in a very short period. The speed of fall is very brutal in nature. We are warning since the beginning of January, when valuations reached to its historical high. This is the highest level of correction after 2008. In 2010 and 2015, Indian markets corrected 28 per cent and 25 per cent, respectively. In 2004, the domestic market corrected 33 per cent and later in 2006, it corrected 30 per cent. Barring 2008 financial crisis, this is the severe most correction after 2002. As we entered into category-3 correction, there is a higher probability that the current decline can extend up to 50 to 60 per cent from the top. Interestingly, the present correction already has more than 78.6 per cent of 2016 to 2020 bull market. This four bull market returns were eroded in just two and a half months. All the category-2 corrections ended with the maximum of 50 per cent retracement. As this correction was more than the previous corrections, barring 2008 (64 per cent) and 2000 (58 per cent), this is going to be another big correction. Now, the market has breached all the major supports and is below the monthly up trending channel. It also retraced more than 38.2 per cent retracement of 2008-2020 super cycle bull market. At the same time, it also breached 100 monthly moving averages. Interestingly, on Thursday, it took a support at December 2016 swing low support and tried to close in a positive territory. The effort of pullbacks of March 13 & 19 did not produce a meaningful bounce since these bounces failed to close above the prior bar highs. The general rule is that, the market cannot have 90 degree fall or rise for a longer period. It has to enter into a counter trend consolidation for a brief period at least. To get a confirmation on this consolidation, Nifty has to close above the prior bar high. As long as Nifty is unable to move above the prior bar high, avoid long positions. If Thursday’s low is protected and if a daily bar closes above the prior bar high then, Nifty can move towards 8,918 and 9,588. We cannot expect a sharp recovery as the market conditions - domestic and global- are not conducive. As the most businesses lock downs, we cannot expect Q4 earnings to be normal. Any kind of decline in the earning again will lead to a higher PE ratio. If the correction extends to 50 per cent, Nifty may test the breakout level of 2014, which was 6350. We do not want to go beyond this level as already the fear index is at 2008 levels. Therefore, we think that by this, Nifty PE levels will also reach below 15. We can find some long-term investable ideas there.

NIFTY DERIVATIVES: Nifty futures lost 1,332.65 points or 13.95 per cent since the last weekly expiry. As we mentioned previous week, that because of the highest volatility, the option premiums has become expensive. That is the reason on Thursday, even the money (ITM) option premiums got eroded. Nifty open interest declined by 3.17 per cent and Bank Nifty open interest was also down by 3.94 per cent. This indicates that the unwinding in the positions was done. The rollovers were seen at 21.75 per cent, which is higher in the recent past. The put-call ratio (PCR) is at 1.00 for March series. Interestingly, as the volatility and the swings are very high, the deep out of the money option strikes also have a highest open interest. The 12,000 call strike has an open interest of 21,56,400. The other new phenomenon is that, ‘in the money’ strike also has maximum open interest. The 8,000 strike calls have an open interest of 565,050. The total call open interest is at 30663450. On the put side, the total open interest is at 30842550. All at the money (ATM) call options witnessed a short built-up. On the put side, a long built-up was seen. India VIX has reached to the 2008 levels. In just one week, it rose from 51.47 to 72.2. During this month, the VIX rose from 23.23 to 72.20 as the money options have a highest implied volatility of more than 90. This kind of highest implied volatility increases the premiums. As we are entering monthly expiry, the volatility will increase further. As the price swings are very high, the neutral and volatile strategies are also not viable now. You are advised to trade with limited capital and a small position sizing for some period.

Market is experiencing wild swings and hence, we are not recommending any long positional technical pick this week in our ‘Pick of the Week’.

Bollinger Band Squeeze is reflection of a phase where volatility contracts. Currently, we are witnessing absurd volatility in the market. So, there is no output at this point of time.

REVIEW OF STOCK STRATEGY

We had recommended our readers to buy the stock of Coromandel International Ltd at Rs 561 in issue no. 21 (dated March 16, 2020). Post our recommendation, the stock did not sustain at higher levels as a selling pressure emerged in the market and the stock slipped below the stop-loss level. We recommend our readers to exit with a loss. We exited the stock at Rs 520.55 on March 19, 2020.