Technical Analysis

WHAT LIES AHEAD : NEAR-TERM PICTURE

SPOT NIFTY :

Finally, the low volatility has shown its power of inverse relationship. The rise in VIX and the impulse decline in the index are in line with the expectations. Today's fall of over one per cent with an extreme negative market breadth and high volumes led to another distribution day. The distribution day count has increased to five, which shows a classical distribution pattern. Nifty gained just 48 points during the last five trading sessions. It erased four days of gains in a single blow i.e. in just one session (today).

The level of 15,900 has become an arduous resistance for Nifty. It was tested at least six times. The classical technical analysis says the seventh resistance is rare but if it happens, it will be a wonder! So, next time, either it has to break out on the upside or on the downside decisively with a volume. Today's move is destructive in many terms. Firstly, it failed to cross the resistance even after several attempts. Secondly, the price actions witness a double-digit increase in VIX i.e. an indication for the storm, for which, we are cautioning for the last few weeks. It filled the gap of July 5. Closing below the 20-DMA on contracted Bollinger bands is another indication of an explosive move on the cards. Nifty has broken the two-level of trend line supports. The first one is ascending triangle's downside breakout, which will have bearish implications with an impulsive move. The second support line, drawn from April 22, also broke decisively today but did not close below it. This support breaking from the resistance line on a single day indicates a stronger bearish tone present in the market. Even Bank Nifty also registered a failed breakout today. After testing six consecutive weeks, Bank Nifty finally gave up the strength to the bears.

As we mentioned in the previous weeks, the 15,635-670 zone of support is crucial now. Closing below this means the index formed a lower low. Prior to today, there were four up and down days each. In any case, if Nifty declines more than 3 days and closes below the 15,600 levels, it will enter into a short-term downtrend. It may retrace up to 38.2 per cent level of 15,240. There is support at the prior swing low and 23.6 retracement level of 15,498. Unless it closes above 15,900, avoid a long position in the index.

NIFTY DERIVATIVES:

Nifty futures closed near the last weekly expiry level. Expiry to expiry, it just gained 20.4 points. An interesting aspect of the current week is the rise in VIX. It went up by 5.6 per cent during the last five sessions and by 21 per cent from Wednesday's low. And the implied volatility for monthly options rose above 10.26 from 9.47. For the next weekly expiry, the IV is at 11.50 for the at-the-money (ATM) options. This uptick will result in high premiums. Generally, ATM option premiums will be costlier when IV is higher. The open interest is up by 14.9 per cent and indicates a short build-up in the market. The monthly put-call ratio (PCR) is at 1.31 while the next week’s PCR is at 0.67.

For the next weekly expiry, the total call open interest is 3,88,152, and the total put open interest is 2,58,574. The highest call open interest is at 15,800 strikes with 46,057, followed by deep-out-of-the money strike 16,500 with 43,264 of open interest. The 16,000 and 15,900 strikes have an open interest of 38,592 and 37,780, respectively. On the put side, the deep-out-of-the-money strike 15,000 has the highest open interest of 27,556, followed by 15,500 strike with 24,702. The 15,700 and 15,800 strikes also have higher open interest with 22,283 and 22,211, respectively. There was a huge call selling that happened today. The 16,000 to 15,400 strikes witnessed the short build-up in call options. The 15,700 and 15,750 strikes witnessed an increase of 953 per cent and 839 per cent in the open interest along with a price decline. At the same time, longs were built up on the put side almost all the strike. One or two in-the-money strikes witnessed a short covering. Overall, with the IV's increase, the premiums become dearer, and any mean reversion of IV will result in a sharp collapse in the option premiums. Max Pain for the next week is at 15,800 while the VWAP is at 15,728.

TECHNICAL RECOMMENDATION

STOCK STRATEGY

DEEPAK NITRITE LTD. ................. BUY ................... CMP Rs 1935.10

BSE Code : 506401
Target 1 : Rs 2,150
Target 2 : Rs 2,230
Stoploss : Rs 1,747(CLS)

n Current Observation: Deepak Nitrite is one of the oldest and leading chemical companies in the country. With its 56 applications and over 100 products, the company enjoys a leadership position in the segment. n Technically, the stock is trading 2 per cent above the pivot. The stock is 8 per cent above the 50-DMA while 53 per cent above the 200-DMA. All the short and long-term moving averages are trending up. The stock is forming a base for the last week. Its relative price strength is good at 81 and is also, meeting all the CANSLIM investing rules. It is also registering above-average volumes for the last two weeks. n The weekly MACD is about to give a buy signal. The ADX (54.44) shows strong trend strength. The RSI is in a bullish zone. The stock has a great fundamental and technical strength to maintain the momentum on the upside. It is also in a linear uptrend, moving higher base by base. n Accumulate this stock in the zone of Rs 1,900-Rs 1,950. Maintain a stop-loss at the prior week's low of Rs 1,747 level. The short-term target is placed at Rs 2,150 while the medium-term target is at Rs 2,230.

REVIEW OF STOCK STRATEGY

We had recommended our readers to buy the stock of Schaeffler India Ltd at Rs 5,611.60 in issue no. 37 (dated July 05, 2021). Post our recommendation, the stock witnessed a correction along with below 50-day average volume. Currently, it is hovering around the 34-day EMA level. However, we can expect to see smart upmoves if it closes above Rs 5,600 level. We would advise our readers to hold this stock with a stop-loss of Rs 5,200 on a closing basis as the stock is likely to move higher from the current levels.