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 the number of rising to falling stocks. As long as the stocks that are gaining outnumber the losers, bulls are dominant. This metric gauges the risk appetite of one marshmallow traders. These are pure intraday traders.
The Nifty lost 1.14% last week, but intraday traders still seemed to exhibit optimism, as the ratio was at 1.12 (prior week: 1.15). This means there were 112 gainers for every 100 losers. That is because the sell-off was seen on Thursday and Friday. Intraday traders were gung-ho between Monday and Wednesday.
Ideally, this ratio must rise with prices to indicate a sustainable rally. Watch this ratio keenly. As long as it stays above the 1.0 level, bulls are doing ok.
A tutorial video on the Marshmallow theory in trading is here
The second chart I share is the market-wide position limits. This measures the amount of exposure utilized by traders 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.
Traders expanded their exposure significantly last week. The MWPL reading is the highest in the commensurate week after the January series expired. Do note that there have been approximately four dozen new stocks added to the derivatives list. A high MWPL reading means the absolute rupee figure is significantly high.
High MWPL remains a double-edged sword as it leaves the possibility open for “crowded exits” in case of any bad news. Coupled with a margin trading facility wherein retail investors can borrow money from brokers to buy stocks, MWPL is a good gauge of risk appetite. MTF is at highs, which means retail traders may be biting off more than they can chew.
A dedicated tutorial video on how to interpret MWPL data in more ways than one is available here
The third chart I share is my in-house indicator ‘impetus.’ It measures the force in any price move.
Last week, both indices fell with rising impetus readings. That tells us the selling was forceful and participation levels were relatively higher. This indicates a possibility that short sales may have increased, and they may cushion declines if any big-ticket buying emerges.
The final chart I share is my in-house indicator ‘LWTD.’ It computes lift, weight, thrust and drag encountered by 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.
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Last week, the LWTD indicator warned of limited fresh buying, and sure enough, the markets lacked the firepower to absorb all selling. Now, the LWTD indicator has risen to 0.11 (prior week -0.21), which indicates that short covering could cushion declines and/or trigger a temporary rally.
A tutorial video on interpreting the LWTD indicator is here
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Description – Market-Wide Position Limits
Prognosis – Higher risk appetite will trigger volatility
Data Source – Vijay L Bhambwani
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Nifty’s Verdict
The weekly chart of the Nifty indicates a bearish piercing candle. That occurs when the last bearish candle’s body pierces the prior bullish candle’s body by at least 50%. It is equivalent to a knife attack on a person. Though it may not be fatal, it is enough to wound the victim.
Last week, I advocated a last-mile hurdle at the 25,250 level, and the same proved prescient as the weekly high was 25,222. The same level remains as a hurdle to watch this week. On the flip side, staying below the 24,400 sustainably opens the door to fresh potential declines.
The price is above its 25-week average, which is a proxy for a retail trader’s six-month average cost. That tells me the medium-term outlook remains optimistic for now. The market will continue to be news-driven and nervous. Trade light.
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 58,200 – 54,950 and 25,725 – 24,300 on the Bank Nifty and Nifty, respectively. Both indices traded within their specified resistance levels.
This week, I estimate ranges between 57,175 – 53,850 and 25,400 – 24,025 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.
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