Vijay L Bhambwani’s Ticker: Markets under “fog of war”

Good morning! Last week, I wrote that bulls would attempt to corner bears. But this was subject to the caveat—“attempts by bulls to trounce bears will be subject to no new surprise negative trigger emerging to play party pooper.” The surprise element was the Indian armed forces carrying out retaliatory strikes on Pakistan in reply to the Pahalgam terror attacks. As the rhetoric and DIP-ping (disinformation protocol in military parlance) by Pakistani media and social media escalated, traders displayed caution.  

This is a routine phenomenon, and veteran market players are unlikely to be fazed by it. Do note how the weekly losses are primarily because of the fall on Friday alone. Markets were calm on the prior days.

The primary fear gripping retail sentiments is whether the two sides will go to a full-scale war, and whether nuclear weapons will be used. In my humble opinion, the answer to both these questions is—no. Remember the last serious military engagement between Indian and Pakistani forces was during the Kargil conflict. Note the word “conflict” and not war. The Indian armed forces did not classify Kargil as a full-blown war but as a LICO (low-intensity combat operation). The level of engagement, loss of lives, and armaments used was far greater than in the current operations. Total mobilisation, cancellation of leave of all military personnel, has not been put in place, and no declaration of war has been sounded.

That the retail trader will be nervous can be gauged from the fact that the district magistrate of Chandigarh has banned hoarding of household essentials, including food, to avoid shortages. Regulatory announcements are unlikely to be confined to day-to-day living matters. I expect financial market regulators and/or stock exchanges to raise ad-hoc, extreme loss margins (ELMs), concentration (exposure) margins, and maybe even trading caps if volatility escalates from present levels.

For any short-term trader, the simplest strategy to ensure survival during challenging times like these is capital preservation. Capital is your freedom to trade. Lose it, and you lose your ability to trade as well. Bullion can receive buying support on declines, as has been seen since the last few quarters. Safe-haven buying is likely to persist. Look beyond 2025 and even further. The long-term picture remains as favourable as ever.

In the commodities space, oil and gas have risen on optimism over a trade deal between the US and China. Upsides are likely to be limited, and therefore, stock prices of related industries will also witness average volatility in line with the broader markets. Industrial metals are showing pressure at higher levels, and stock prices of metal mining companies will see limited upside, too. Banking and financial sector stocks will remain in the limelight due to the sector commanding 37.74% weightage in the Nifty. My readers should trade lightly and focus on capital preservation. Stop losses must be maintained, and tail risk (Hacienda) hedges must be kept in place.

A tutorial video on tail risk (Hacienda) hedges is here – https://www.youtube.com/watch?v=7AunGqXHBfk 

Rearview mirror

Let us assess what happened last week so we can guesstimate what to expect in the coming week.

The fall was led by the banking index, which dragged the broader-based Nifty 50 due to its sheer weightage alone. A firm US dollar further subdued sentiments, which were cautious due to the ongoing tension between India and Pakistan.

Safe-haven buying in bullion recommenced, triggering risk-off sentiments for paper assets. Oil and gas rose on hopes of a trade deal, which is likely to raise inflationary concerns in the near term. The rupee weakened against a rising dollar, dragging sentiments lower. The Indian 10-year bond yields rose mildly, adding to the pressure on the Bank Nifty.

The NSE lost 1.53% of its market capitalisation, which shows a broad-based selling bias. Market-wide position limits (MWPL) rose routinely after expiry. Nervous US markets provided headwinds to our markets. 

Retail risk appetite

I use a simple yet highly accurate yardstick for measuring the conviction levels of retail traders—where are they deploying money. I measure what percentage of the turnover was contributed by the lower- and higher-risk instruments.

If they trade more of futures, which require sizable capital, their risk appetite is higher. Within the futures space, index futures are less volatile than stock futures. A higher footprint in stock futures shows higher aggression levels. Ditto for stock and index options. 

Last week, this is what their footprint looked like (the numbers are the average of all trading days of the week) –

Turnover contribution in the capital-intensive futures segment rose, which indicates higher retail participation.

In the relatively lower-risk options segment, turnover rose in the higher-risk stock options and fell in the least-risk index options. Overall, participation levels were normal.

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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 rising and 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 ground last week, and the advance-decline ratio edged higher. However, it still displayed weakness at 0.98 (prior week 0.72). That means there were 98 gainers for every 100 losers. Intraday risk appetite was subdued. It must be noted that the fall was primarily due to the weakness on Friday. Watch this metric keenly in the days ahead.

A tutorial video on the Marshmallow theory in trading is here – www.youtube.com/watch?v=gFNKvtsCwFY 

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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 is a gauge of the risk appetite of two marshmallow traders. These are deep-pocketed, high-conviction traders who roll over their trades to the next session/s.

Though the MWPL reading rose last week, the levels recorded in the second week after expiry were the lowest in the 20-week period covered in the chart. That tells us retail traders were enhancing their commitments at the slowest pace in months. Unless this reading rises strongly, bulls are likely to sit on the fence.

A dedicated tutorial video on how to interpret MWPL data in more ways than one is available here – https://www.youtube.com/watch?v=t2qbGuk7qrI 

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The third chart I share is my in-house indicator ‘impetus.’ It measures the force in any price move. Last week, both indices fell. But the impetus reading of the Bank Nifty rose, whereas the Nifty reading fell. That tells us Bank Nifty witnessed forceful selling, and Nifty fell due to a lack of buying support. Do remember the heavy weightage of the banking and financial stocks in the Nifty 50.

I often compare these indices to the two wheels of a bicycle. They must move in unison or the bicycle (market) risks toppling. Watch the Bank Nifty keenly this week. 

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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 it to traded securities helps a trader estimate prevalent sentiments.

The Nifty logged losses but the LWTD rose spectacularly to 0.51 (prior week -0.22). That tells us this week may witness either more aggressive short covering on decline and/or improved fresh buying. This is ofcourse subject to no new fresh negative triggers emerging.

A tutorial video on interpreting the LWTD indicator is here – https://www.youtube.com/watch?v=yag076z1ADk 

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Nifty’s verdict

Last week, I warned you that the 24,800 hurdle was significant because of the overhead supply expected at that level. Markets failed to scale higher to that resistance area due to the prevalent nervousness. So, this hurdle remains a trend-determining threshold that bulls must overcome to regain control.

The week has logged a bearish engulfing pattern. This occurs when the last large-sized bearish candle’s body engulfs the prior smaller bullish candles’ bodies. It indicates bears have engulfed or subdued bulls. Unless the high of this bearish candle at 24,526 is overcome forcefully, no new bullish breakout is possible. Even then, the 24,800 area resistance remains in place.

The price is above its 25-week average, which is the six-month average holding cost of a retail investor. The medium-term outlook is positive until the price stays above this average. I suggest short-term traders abstain from buying until the 24,526 level is overcome forcefully. 

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Your call to action

Watch the 24,526 level as a near-term resistance. Staying above this level strengthens bulls.

Last week, I estimated ranges between 56,825 – 53,425 and 25,075 – 23,600 on the Bank Nifty and Nifty, respectively. Both indices traded within specified parameters.

This week, I estimate ranges between 55,325 – 51,850 and 24,750 – 23,250 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.

Vijay L. Bhambwani

Vijay is the CEO of www.Bsplindia.com, a proprietary trading firm. He tweets at @vijaybhambwani