Volatility suggests market in tight bear grip; avoid bottom fishing till Nifty sees strong reversal
Motilal Oswal Financial Services
The Nifty has been making lower highs-lower lows on a weekly scale and has fallen around 1,500 points in the last five weeks. It formed a bearish candle on the daily and weekly scale, which suggests that bears have a tight grip on the market. On the daily scale, the Nifty has formed a Three Black Crows pattern as bears are riding the decline and given the lowest weekly close in the last 26 weeks.
Now, till the index holds below the 10,500 zone, it may continue its extended weakness towards 10,200 and psychological 10,000 zones. On the upside, the medium term hurdle is shifting from 10,850 to 10,650 levels. It has fallen to the lower band of the rising channel on the weekly scale, formed by connecting the swing lows of 6,825 and 7,893 and swing highs of 7,972, and 8,968.
Now, till the Nifty doesn’t surpass any immediate hurdle, the overall weak structure could continue to push the index lower while limiting the upside.
The index has fallen around 614 points in the week gone by as it has broken all the major levels like the 61.80 percent retracement at 11,650, maximum put open interest congestion zones of 11,500-11,450 and 50-week exponential moving average and is gradually drifting lower given the higher pace of selling pressure.
Volatility shows no signs of cooling down and suggests a tight bear grip on the market. India VIX surged around 16 percent this week to 19.73 and is moving upwards for the last three consecutive weeks.
On the option front, maximum put open interest (OI) stands at 10,500 followed by 10,700 strikes. Maximum call OI stands at 11,000, followed by 11,200 strikes. We have seen significant call writing at 10,500, 10,600, 10,700 and 10,800 strikes, while put unwinding is seen at all immediate strikes.
Now, put unwinding at 10,500 strike could propel the Nifty towards 10,200 zones. The option band signifies a shift to a lower trading range, with immediate hurdle at 10,500 and 10,650 zones.
The Bank Nifty remained in a range in the early hour of Friday, but fell sharply after the Reserve Bank of India’s bi-monthly policy meet and corrected towards 24,250 zones. It has been making a lower top-lower bottom on the weekly scale and is approaching its March lows of 23,600. Till it remains below 25,000 zones, it could continue its weakness towards 24,000 and 23,600 levels.
Most sectoral indices were under pressure last week, while many heavyweights fell sharply. Till the index doesn’t pause its selling mode by crossing any immediate hurdle, investors should avoid bottom fishing. A sharp cut of 15 percent from higher zones have changed the price structure of most heavyweight, mid- and smallcap stocks, the upside seems to be capped for the time being.
Selective IT, few metal and pharmceutical counters may see some support based buying, while most automobile, FMCG, oil and gas, mid- and smallcap stocks may continue their downward journey.
Indian indices have fallen to their 26-week lows and the effect of depreciating rupee and volatile crude are weighing high on domestic indices as foreign institutional investors are also turning net sellers.
Disclaimer: The author is Associate Vice President | Analyst-Derivatives at Motilal Oswal Financial Services. The views and investment tips expressed by investment experts on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.