Though we had opened last week staring at an abyss, we were mostly certain that we would avoid a covid like collapse, partly banking on April usually being a good month, and partly leaning on standard deviation signals pointing to mean reversion.
Now that we are away from extremes, the question is whether momentum or volatility will dominate this week, given there are only three trading days this week.
Broader market recovers. Sustainability is a question
Clearly, a strong recovery has come about, especially having seen unprecedented volatility on either sides through the week. About 47% of Nifty 500 constituents have closed above Friday’s close, underscoring this. However, Friday having closed lower, acting as a tipping point of break down that followed on Monday, Friday’s open could be a better reference point. The number of constituents closing above Friday’s open is just 24% pointing the potential for rejection trade lurking round the corner. Similar numbers are seen among Nifty 50 constituents too. So, while we have closed Friday full of hope, Monday could see caution returning.
Bank Nifty heavy weights brace for earnings impact
The afore mentioned signal is also visible in Bank Nifty, whose heavy weights are coming out with their Q4 earnings shortly. HDFC Bank and ICICI Bank, which form more than 50% of the index, are technically looking neutral to negative, pointing to a potential for rejection trades reappearing after initial bullishness on the index. Kotak Bank and Axis Bank, which are looking positive, could lend support to the index if the other majors pull back.
Nifty outlook
Post the shock and awe of last week, the market appears to have come to peace with the worst case scenarios of trade war. Global indices having closed higher on Friday is testimony to this. That Nifty managed to keep overnight gains intact on Friday, is also a signal towards this end. However, that VIX has fallen just 6% on Friday, does not sit well with a projection beyond 23,000 for now. We are still over 46% above the VIX levels seen prior to last week’s mayhem, suggesting that caution is till lurking. With this in perspective, we are not keen on committing beyond 23,000 for the time being, unless there is drastic fall below VIX. With a shortened trading week, the odds of the same remain low.
We had gone in last week limiting downsides to 21,800, which incidentally is from where the recovery swing unfolded. But the swing there of has taken Nifty within touching distance of the 20-day SMA adding further reason to why we might enter into air pockets in the coming days. But a slippage towards 22,500-350 could further rejuvenate the trend, and render the upswing more sustainable.
Alternatively, a direct rise 23,000 would be sure to face turbulence could still run on, aiming 23,400 or 24,000. The odds of the same appear low though, at this moment. This scenario prompts us to keep a watchful eye on VIX which has refused to slip despite the firm close on Friday. A sharp fall in VIX, ideally below 15 could encourage us to abandon caution. But with just three working days this week to play out such scenarios, and with one of them having weekly expiry, the odds of a sharp fall in VIX looks like a difficult scenario. Favoured view expects VIX to remain elevated, as the wild moves have extended to global currencies as well as treasuries, with gold continuing to retain its allure. It is fair to say that it would require more time to see volatility ease, but we will have stock specific moves in play in the coming days, as the focus shifts to earnings.
About author
The author is Anand James, Chief Market Strategist at Geojit Investments.