Higher volatility ahead, India VIX to move back above 25 in run-up to budget


Private banks have a bigger weight in the Bank Nifty basket and are acting as an antagonist for the bulls.

Pritesh Mehta

January 23, 2021 / 12:14 PM IST

The Nifty was on a roller coaster, marking a low of 14,223 and a peak of 14,754 during the week. Such whipsaw moves in a short span of time indicate higher price volatility and we expect the benchmark index to move between 14,750 and 14,200 zones.

Lack of participation by the banks in the recent upmove is the critical reason for the loss of momentum in the benchmark index. We expect India VIX to move back above the 25-mark in the run up to the Union Budget to be presented on February 1, suggesting that recent whipsaw moves are likely to continue.

The index stayed above the 14,500-mark on January 21 but it proved futile as the Nifty failed to conjure up any pullback in the next day’s trade. In fact, decay picked up in the noon led by the fall in index heavyweights, especially banks. The Nifty’s advance-decline breadth was negative, with 41 stocks closing in the red. It eventually closed lower by 1.5 percent at 14,372. Bias was firmly on the downside as even the intraday recovery moves failed to sustain. Such short-lived pullbacks clearly show that the Nifty is entering a grinding phase of exceptionally high whipsaw moves.

The ratio of the Bank Nifty to the Nifty had rallied around 20 percent from its September 2020 lows. However, it is now facing multiple hurdles from the December 2019 peak. The Bank Nifty’s underperformance has been a constant theme for the past two months, with the ratio trading below its 10-column average on point & figure (P&F) chart and it marked a double bottom sell pattern, implying weakness in the bank, especially in the Nifty private bank basket.

Standalone P&F chart of the Nifty private bank index has given a double bottom sell with a bearish anchor column, reversing lower from a pattern re-test zone (ie facing supply around the same area since May 2019). The private bank has a bigger weight within the Bank Nifty basket and is acting as an antagonist for the bulls.

Indian markets have been rising along with rising options volatility in the past four weeks, as participants prepare for earnings reactions and the budget. Options volatility skew indicates OTM options getting expensive than ATM, hinting at higher volatility expected in the upcoming event.

We expect India VIX to move back above 25-mark, moving into early budget days, suggesting that whipsaw moves are likely to continue.

The Nifty Auto index outperformed on January 22, bucking the negative trend and rallied more than 3.3 percent this week, outperforming the Nifty. On P&F ratio chart of the Nifty Auto/Nifty 50 index has given a double top breakout after forming a bullish anchor column, implying that auto stocks will continue to outperform.

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Pritesh Mehta is a Lead Technical Analyst – Institutional Equities at YES Securities. He holds a Master’s degree from NMIMS. Prior to this assignment, he was associated with IIFL for 13 years as one of their lead technical analysts. His skills and forte include in-depth technical analysis and identifying actionable momentum trades. Pritesh excels in trend identification, with a special focus on inter-market analysis, gann & ratio charts.